IT sector looking for ways to maintain buoyancy

India’s IT services companies have in the latest quarter (Q2 2021-22) put in a stellar performance. The Covid-19 pandemic has turned out to be a blessing in disguise for them, boosting demand. TCS’s revenue for the quarter grew by 16.8 per cent over the same quarter in the previous year, Infosys by 20.4 per cent and Wipro by as much as 30 per cent.

To keep their head above the water virtually, all large businesses have sought to go digital as quickly as possible and put their data and applications on the cloud (at common data centres). The Indian IT companies which have a cost advantage (relatively lower salaries for their engineers) have sought to cash in on this and ramp up their digital offerings.

Infosys now has over half of its offerings in the digital category. Plus, the IT companies have reaped a cost-and-productivity advantage by allowing their staff to work from home. All this has improved margins and their share valuations. TCS, the biggest of them all, achieved a huge margin of 25.6 per cent, with Infosys following not far behind at 23.6 per cent and Wipro at 17.8 per cent.

But in this boom time of sorts, a dark cloud has also begun to hover on the horizon. As all IT majors seek to ramp up their digital offerings, there is a huge demand for engineers equipped with the right skills. The vendors are seeking to entice away each other’s staff and this is leading to huge attrition which is now nudging an incredible 30 per cent. Cognizant had the dubious distinction of leading the pack with an attrition rate in the quarter of 31 per cent, Infosys and Wipro both crossed 20 per cent and TCS, which traditionally kept its attrition rate in single digits, ended up at 11.9 per cent.

In this scenario, the IT companies are doing the only thing they can in the short run (it takes quite a bit of time to train fresh graduates in digital skills) — raise compensations. If things go on the way they are doing right now, the vendors will soon see a sharp hike in their costs (staff compensation is the biggest expenses for firms in the services space) which will affect profitability and share value.

Additionally, a shortage of trained staff will affect the quality of their offerings. This will over time put off clients who will either try to go elsewhere or postpone their digital plans. Infosys has recently been in the news for not just good results, but a wrong reason — the quality complaints from the government and taxpayers on glitches in the new tax portal whose work has been contracted to it. It is unclear right now if the next big government order will go to the firm as easily as it did earlier.

Across the board quality complaints among the IT clients will eventually dampen the demand for services from Indian vendors and kill the goose that was laying the digital golden eggs. They will perforce have to look for vendors elsewhere who will not come as cheap as the Indians did, but will at least be able to offer a minimum quality of service.

The skills shortage currently plaguing the older Indian IT vendors comes not just from the highly rapid expansion in demand for digital services but another sector too — the startups which need high-end input from their staff to be able to deliver the innovative products and services which they promised when they came into being with venture capital and early stage funding. As they can wait for some time before breaking even and begin to give a return to their investors, they are often paying top rupee to get the skills they need. And with such compensation packages, they are taking away the best skills from the large IT services companies.

The challenges that Indian IT services firms are facing do not end there. There is increasing demand in the US, the foremost market for Indian IT services, to source the offerings from within the country and not development centres located in India. Competitively priced offshore deliveries tend to depress US technical workers’ wages who are in the same kind of war that manufacturing industry worker unions wage against cheap Chinese imports.

Mindful of this kind of sentiment, Indian IT majors are rapidly increasing their staffing in the US, as opposed to work sourced from offshore delivery centres. These US workers have to be paid much more than what their counterparts in India earn and as this process gathers steam, it will reduce the Indian IT companies’ margins.

How can Indian IT address this challenge? It is important to remember that although IT services have traditionally been in most part routine jobs involving writing codes and looking after maintenance — jobs which have in good part now gone because of the advent of automation — there has been no dearth of innovativeness on the part of those who run those companies.

Hence, there have been several instances of the world in general foreseeing an end to the forward march of Indian IT because of some insurmountable problem being ahead of it. But over time, those problems have been resolved and the forward march has resumed. Most notably, the bursting of the dotcom and tech bubbles at the turn of the century was foreseen to be an insurmountable hurdle, but over time that was surmounted and the forward push continued. Then growth slowed down during the global financial crisis but contrary to the doomsayers, the growth momentum resumed thereafter.

The current high attrition rate and sharp rise in compensations, partly the result of entry level packages stagnating for a long time, will likely over time generate a supply side response. Not only will intake in computer science programmes in engineering colleges increase, the higher education industry will come up with new programmes which will be able to hand over to the industry more finished products who will not have to be trained for months.